Leveraging Asset Value

GMR divests stake in airport business

About six years ago, GMR Infrastructure Limited (GIL) resorted to what it referred to as an “asset light, asset right” approach. At the time, the company, like several other infrastructure players, started the divestment of stakes in non-core assets that were bogging down its balance sheet. With its total debt level reaching Rs 423.49 billion in 2012-13, GIL has been making several attempts to cut down its debt burden since then. As of March 2018, the company has been successful in reducing its total debt level to Rs 230.67 billion.

In March 2019, GIL made yet another announcement, unveiling the proposed investment by the Tata Group, Singapore’s sovereign wealth fund GIC Private Limited and Hong Kong-based SSG Capital Management in its airports business. GIL has signed a binding term sheet with the investors pursuant to which they have agreed to invest Rs 80 billion in GMR Airports Limited (GAL). With this landmark deal, GIL aims to pare its debt burden and capitalise on growth opportunities in the airport sector.

This is one of the largest private equity (PE) deals in the Indian aviation sector. It also marks the foray of the Tata Group into the airport business, becoming the first company to have a presence in both the airport and the airline segments in the country.

iaries. While 45 per cent of the equity investment will be put in by the Tata Group, GIC Singapore and SSG Capital Management will infuse 33 per cent and 22 per cent respectively. The proposed investment is subject to definitive documentation, customary regulatory approvals, lender consent and other approvals. While Link Legal acted as the transaction adviser for GIL, J. Sagar Associates was the adviser for the consortium of investors.

The post-money equity valuation of GAL has been pegged at Rs 180 billion by the investors. In addition, the deal includes earn-out payments of up to Rs 44.75 billion linked to the achievement of certain agreed operating performance metrics and receipt of certain regulatory clarifications over the next five years. Therefore, assuming that all earn-outs are paid, the total valuation could reach Rs 224.75 billion on a post-money basis. The contingencies upon which earn-outs are dependent include the continuation of the base access charge regime for the Delhi international airport, which came into effect from December 1, 2018.

As part of the transaction, GIL will initiate the process of providing exit to its existing PE investors holding a 5.8 per cent stake in GAL. These are Macquarie-SBI Infrastructure Investments Limited, Standard Chartered Private Equity (Mauritius) III Limited and JM Financial Old Lane India Corporate Opportunities Fund Limited. Earlier, following an arbitration award in October 2018, these firms had acquired a 5.8 per cent equity stake in GAL at a 100 per cent valuation of Rs 210 billion and received a payment of Rs 35.6 billion in lieu of their compulsorily convertible preference share investments.

GIL’s management expects the deal to be closed within the next three months. Upon completion of the transaction, GIL will hold a 53.5 per cent stake in GAL, while the Tata Group, GIC and SSG will hold 19.7 per cent, 14.8 per cent and 9.9 per cent respectively. The remaining 2 per cent stake will be held by the company’s Employee Welfare Trust. Post closure of the transaction and on successful consummation of earn-outs, GIL’s shareholding in GAL, both direct and indirect, is expected to increase to 61.7 per cent. As part of the terms of the proposed investment, GIL will retain management control over the airport business with the investors having customary rights and board representation at GAL and its key subsidiaries. The deal also includes a non-competing clause between GIL and the Tata Group in the airport business.

Following the investment, GIL proposes to restructure and demerge its airport business. The company has laid out plans to create two different verticals under GIL – one that will be formed with the demerger of the airport business and the other with its remaining businesses of roads, power, coal mining assets in Indonesia and industrial landholdings. Both verticals will operate as separate listed companies in the future.

What the deal means for the Tata Group

It is quite rare for an airline operator to hold a stake in an airport. With this deal, the Tata Group has acquired an indirect stake in seven airports in India and abroad. The group’s strategic entry into the airport sector comes soon after another major private player, the Adani Group, forayed into the sector after emerging as the highest bidder to obtain the rights to operate, manage and develop six airports, namely, Ahmedabad, Jaipur, Lucknow, Thiruvananthapuram, Guwahati and Mangaluru. The deal, however, has been put on hold.

To date, there existed a sort of duopoly in the airport sector, with four private airports being operated by two players – GIL and GVK. As a result, the possibilities for mergers and acquisitions were quite limited. However, with the entry of deep-pocketed private players such as the Adani Group and the Tata Group, this scenario is expected to change. Such deals are expected to increase competition in the sector and, therefore, enhance operational efficiency.

On the flip side, the deal has also attracted criticism from a section of the industry which believes that Tata’s stakes in Air Asia and Vistara and GMR-run airports could lead to a conflict of interest and raise questions of antitrust.

In perspective

The move to divest equity stake bodes well for an infrastructure player as big as GMR, keeping in view the burgeoning corporate stress in recent times. The deal will help GIL in significantly deleveraging its balance sheet. It expects to use the monetisation proceeds of Rs 70 billion for retiring its net corporate debt of Rs 64 billion and funding purchase of a 5.8 per cent stake of GAL’s existing PE investors. Further, GAL will use fresh proceeds of Rs 10 billion to partly retire its stand-alone net corporate debt of Rs 20 billion. As a result, GIL’s net debt will reduce by 40 per cent from Rs 200 billion to Rs 120 billion.

As per the company’s BSE corporate filing, Grandhi Kiran Kumar, managing director and chief executive officer, GIL, believes that the proposed investment endorses the strength of the unparalleled airport platform created by the GMR Group and will reduce the company’s debt substantially, thereby strengthening its balance sheet. “This proposed investment by marquee investors like Tata, GIC and SSG reaffirms the significant and long-term investment opportunity in the fast growing airport infrastructure space with a large pool of capital that can be tapped to grow GMR’s airport infrastructure business,” he says.

The deal will pave the way for the demerger of businesses, post which GMR will be attractively positioned as a pure airport player with strong growth potential. Further, this partnership with long-term marquee investors will facilitate the creation of a world-class airport development and management platform.